Derivatives and volatility glossary
The terms I use, defined the way they are used on a desk, with a worked example and what practitioners actually watch.
A
B
- Barrier options: knock-in and knock-outOptionsBarrier options are options activated (knock-in) or cancelled (knock-out) when the underlying reaches a set level. Types, parity and hedging risks.
- Box spreadOptionsBox spread: a combination of a call spread and a put spread on the same strikes with a fixed payoff at expiry. How it works as a financing trade.
C
- Call spreadOptionsCall spread: buying a call and selling a higher-strike call on the same expiry. Cost, maximum gain and loss, breakeven, and how skew affects pricing.
- Clearing houseFutures & market structureA clearing house is the central counterparty that steps between buyer and seller of a cleared trade and guarantees it through margins and a default fund.
D
- DeltaOptionsDelta is the sensitivity of an option's price to a one-unit move in the underlying. How it is used for hedging, and why it is not a pure probability.
- Dispersion tradingVolatilityDispersion trading sets index volatility against the volatility of its constituents to trade the gap between implied and realised correlation.
F
G
- GammaOptionsGamma is the rate at which an option's delta changes when the underlying moves. How long and short gamma positions behave and what the trade-off is.
- Give-upFutures & market structureGive-up is the transfer of a listed trade from the executing broker to the client's clearing broker under a tri-party agreement.
I
M
P
- Phoenix noteStructured productsA phoenix note is an autocall that pays a periodic coupon whenever the underlying is above a coupon barrier, even if the note is not called.
- Put ratio spreadOptionsPut ratio spread: buying one put and selling a larger number of lower-strike puts. Payoff profile, breakeven, and the tail risk below the short strike.
Q
R
- Realised volatilityVolatilityRealised volatility measures how much an asset actually moved over a past period, as the annualised standard deviation of its returns.
- Risk reversalOptionsRisk reversal: buying an out-of-the-money call and selling an out-of-the-money put, or the reverse. How it trades, how it measures skew, its risks.
S
T
- ThetaOptionsTheta is the daily loss of value an option suffers as time passes, all else equal. How time decay accelerates near expiry and how it offsets gamma.
- Twin WinStructured productsTwin Win is a structured product that pays the rise of an underlying and turns its fall into a gain, as long as a downside barrier is not breached.
V
- Variance swapVolatilityA variance swap is a forward contract on the realised variance of an underlying, with a strike fixed at inception. Payoff, notionals and convexity.
- VegaOptionsVega is the change in an option's price for a one-point move in implied volatility. How vega scales with maturity and strike, and how desks manage it.
- VIXVolatilityVIX is the Cboe index of 30-day expected S&P 500 volatility, derived from SPX option prices. How it is computed, how VIX futures work, what to watch.
- Volatility risk premiumVolatilityVolatility risk premium is the gap between implied volatility and the volatility later realised, paid to sellers of options for bearing tail risk.
- Volatility skewVolatilityVolatility skew is the variation of implied volatility across strikes for one expiry. Why equity index puts trade richer, and how skew is measured.
- Volatility term structure: contango and backwardationVolatilityVolatility term structure plots implied volatility or VIX futures by maturity. What contango and backwardation mean and how roll-down affects P&L.
- VSTOXX (V2X)VolatilityVSTOXX (V2X) is the STOXX index of 30-day expected EURO STOXX 50 volatility, derived from Eurex index options. Method, futures and practical points.
- VVIXVolatilityVVIX is the Cboe index of the expected 30-day volatility of the VIX, derived from VIX option prices. What it measures and how traders read it on a desk.